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Isn't this one of those "If everyone is crazy, you're crazy" situations? If every house is overvalued by some metric, then maybe the metric is wrong. People's p

Isn't this one of those "If everyone is crazy, you're crazy" situations? If every house is overvalued by some metric, then maybe the metric is wrong. People's perceptions of value are a large part of the actual value(meaning what someone would really pay) for things like housing that should depreciate over time.

11235813213455 4y ago
I don't know how it works in the US, but in France, when you buy an apartment or house, you pay about 8% to the state (notary / attorney fees), that participates in the inflation I guess
- andrewljohnson 4y ago
  In the US, you pay about 6.5-7%. You pay 5.5 to 6% to the two agents (buyer and seller agents) and about 1% in closing costs (title insurance, etc). It has always seemed wildly inefficient to me. Especially the “buyer agent” who gets a couple percent entirely for escorting the buyer through homes and submitting an offer.
  - BadCookie 4y ago
    The buyer’s agent might show someone dozens of properties all around town and not get a sale. The seller’s agent has it much easier: an almost guaranteed sale, and for what effort? They just hire a photographer, help choose a listing price, and maybe do one open house. I’d rather be a seller’s agent any day.
    - andrewljohnson 4y ago
      My buyer’s agent could be replaced by giving me access to MLS and lockboxes. My seller’s agent, on the other hand, was super useful and irreplaceable except by another smart human. I felt like he got us top dollar for the house based on how he renovated, staged, photographed… much more money than we expected. Also, my experience was I set a budget, put my stuff in truck, left my house a dirty mess, handed the agent my keys, and left town. Then he did all the renovating/etc, posted it, collected offers, and we got paid.
mogadsheu 4y ago
No because houses as an asset class could still be overvalued relative to other assets.
- majormajor 4y ago
  So a slightly more sophisticated analysis would be "how does housing appreciation in each market compare to stock market appreciation over the same time period" - but the description in the article leaves that out, looking just at historical incomes/costs/rents. In a world where homebuying is increasingly out of reach of a larger percent of people, you'd expect it to be more disconnected with average or median income/rent, and more pegged to higher percentiles.
  - nemo44x 4y ago
    I mean, just about every house has an owner that lives in it. Homes are expensive. Most people just can’t afford a big slice of land and home. They have to accept they will have to make do in an apartment that may be shared. Should the home they deserve just magically appear?
    - HWR_14 4y ago
      > just about every house has an owner that lives in it Just under 2/3 of US homes have an owner that lives in it.
      - davidgay 4y ago
        What's the number of owners + long-term renters? (the likely relevant metric when looking at housing price vs local incomes)
        HWR_14 4y ago
        Ah, that's one of the ways the statistic I quoted is skewed. Short term rentals aren't considered "homes" by it, so it would be 100%.
jeffbee 4y ago
Well, according to the University of Michigan Survey of Consumers, the "buying conditions for houses" index has reached its lowest point since 1982, with 68% of respondents saying it is a bad time to buy in the March 2022 survey. A year ago respondents were equally likely to say that prices were low or high, now 20x more respondents say that prices are high.
spoonjim 4y ago
There are multiple ways to value an asset other than its current price. One is cash flows: if you rented it, how much money would you get? Another is historical norms: if historically a city with N million jobs providing average income X can only support housing prices of Y, then one could conclude that housing is overpriced relative to the ability of people to pay for it.
- OrvalWintermute 4y ago
  The HCOLA house my wife owns in which we live would rent for ~5,000 a month as it is inside our respective city beltway, in a good school district, in a low crime, historic area. When we got married $5,000 is pretty close to our much smaller apartment rental costs, summed. The vacancy rate is pretty low, and the demand is strong. Like all real estate calculations though, this is completely local.
  - refurb 4y ago
    Just look at the price to rent index - 15 to 16 is neutral (renting and owning cost the same). San Francisco is currently 52. In HCOL areas, renting tends to be cheaper than owning because home price reflect not only cash flow, but expected appreciation as well. https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...
- scarface74 4y ago
  You’re assuming that the people who buy house in an area work in the area. People who are able to work remotely statistically have jobs that pay more. They can live anywhere. A $700K house is a steal for even a mid level person working at BigTech who use to live on the west coast.
Retric 4y ago
Over vs under valued is more a question of stability than current prices. The question is less about today than how risky and how profitable an investment it would likely be relative to other investments.
s5300 4y ago
Not when you have a populace that is by definition average & in need of a place to live/start a family, but have an external investor class of the foreign ultra rich or Wall street douche canoes buying everything up because fuck you & they can. Crazy if you believe most of our nation should be essentially indentured servants for basic housing. Something like that, I think.
- mistrial9 4y ago
  some economic theorists take this seriously -- BlackRock is Buying Houses made a large headline in daily news here.
- fennecfoxen 4y ago
  "essentially indentured servants" is a bit rhetorically distracting, don't you think? Let's pin that down. What's a reasonable amount of work that a human should be expected to do to live? Not just housing, but food, and whatever else.
- tryptophan 4y ago
  Its the Cantillon effect. https://river.com/learn/terms/c/cantillon-effect/ https://river.com/learn/terms/c/cantillon-effect/ Banks will loan some people billions at rates half of which they would give you, if they even gave you a loan. Thus they can buy everything for inflated prices. We need to end the fed.
rufus_foreman 4y ago
>> Isn't this one of those "If everyone is crazy, you're crazy" situations? No. Hopefully you aren't using that justification to do something stupid.
- serf 4y ago
  >No. just no? group consensus and participation shapes nearly every human endeavor; why do you think that this round-a-bout consensus (97%) is unrelated?
  - fennecfoxen 4y ago
    Because for all that today's sales prices are driven by that consensus, you can do math on the expected future income stream (including imputed rent) (adjusting it for interest rates and inflation and risks) and determine that it comes up a bit short by most measures.
pjmorris 4y ago
I think there's a more concrete measure of value: house prices related to income. Historically (Robert Shiller has a chart for the US going back to 1890) house prices (and mortgages and rents) have maintained a stable relationship with income. Occasionally that relationship is strained but it has usually fallen back in line. One exception to this was the extraordinary, ongoing, support to the financial system post-2008. House prices and other financial assets have ballooned in relative proportion to wage income. That's more than a perception of value, that's a matter of social stability as most people depend on the same paycheck for not only housing but food, medicine, etc, as well as housing.
- epistasis 4y ago
  That would work if the supply of houses has kept up with populations growth, and just as importantly, the desired location of where people want to live. If there's housing scarcity, then prices will rise far ahead of ability to pay. That's the source of a lot of other types of today's inflation, for example, cars.
  - state_less 4y ago
    > If there's housing scarcity, then prices will rise far ahead of ability to pay. Housing costs tend toward people's ability to pay, otherwise folks default. That's why the banks ask you about your income and credit worthiness, they want to know you'll be able to pay the mortgage and not default. If money costs increase faster than income, folks won't be able to afford as much money (as high a price).
    - epistasis 4y ago
      Housing costs do tend towards ability to pay, and when there's scarcity, that "ability to pay" starts cutting out those with the lowest incomes, since they do not get the housing. That's how housing costs can increase faster than the income of an area, it's the market displacing those with lower incomes, and readjusting to only house the wealthiest. Add in that housing prices are distinct from the housing costs, and that leases only change rent occasionally, and lots of people are owners and have fixed costs, and prices can rise quite a bit faster than incomes.
discardable_dan 4y ago
Yes and no. I would agree, but housing is, for the most part, fungible (at least for people with tech salaries). If I sold my house, I could pay for rent in my high-cost area for the better part of a decade with just the income off the sale. I am starting to think I might be crazy not to sell and pocket the money: I could rent down the street and pay rent off my salary while that large pile of money collects rent. A house isn't a particularly liquid asset, and half a house worth of liquidity seems like a safer position in the current market.
- mrtnmcc 4y ago
  Rent has also gone up
  - throwaway1777 4y ago
    Not only that; rent can keep going up.
    - forty 4y ago
      And I'll add to that: if you ever have no income (which can happen when you retire for example), at least as a owner you have somewhere to live.
- hackerfromthefu 4y ago
  Look more than 10 years into the future. 20 years from how as a renter your ongoing costs will be high. 20 years from now as a home owner with the mortgage lower and inflation on everything higher, your ongoing costs will be low. Owning a house is an exercise in deferred gratification, similar to owning most businesses.
brewdad 4y ago
We'll find out over the next 6-12 months. At some point, a lot of home buyers started shopping by payment without regard to total price. With interest rates near their lowest in anyone's lifetimes that was workable. With interest rates rising, as buyers who haven't locked in lower rates begin looking at the current payments on offer, they will have to look at lower priced homes or drop out of the market. If this boom has been driven primarily by buyers flush with cash, foreign or domestic, then prices should remain high. Payments are largely irrelevant to cash buyers. Any buyer using debt will be forced into lowering their ceiling of properties they can afford. Home prices should then fall.
- AYBABTME 4y ago
  Home prices will fall if rentals fall, otherwise no one will want to sell and low market supply will keep prices where they care. But with rising interest rates, sustained demand for rental can be expected.
- conductr 4y ago
  The concept of the cash buyer is a bit of a farse as well. What usually takes place is a cash offer. They just need to proof of funds to do this. But then, they get financing to close. Nobody in their right mind is putting that sum of cash in real estate when they could borrow at 2% or whatever it was before the recent run up. The mortgage interest even has favorable tax treatment so it’s effectively much less. Oh and the actual cash can also grow tax deferred. I really don’t understand why you’d actually put a large sum into a house when interest rates were as low as they were.
  - djbusby 4y ago
    Only if you had lots (lots!) of excess cash. That is, folk who are diversifying a big portfolio (ie: a 500k home is less than 20% of your total book)
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vmception 4y ago
The money supply expands primarily by debt, and it relies on people paying back the debt with actual value (or dollars representing the actual value). When tightening, there arent enough dollars in circulation to do that. But the bankers get the actual value (homes, collateral, liens on income) regardless. Lenders dont keep seized collateral on their balance sheet, so they sell it at the best price (and they dont need the max price because they already made so much on interest payments). So they push prices down in their firesales. For the tightening money supplt and people trying to find dollars, think of it like the poison map closing in on Call of Duty Warzone. So you can base housing prices on that outcome.
joering2 4y ago
Overvalued not necessarily mean the value of current stock has to drop. This is - an ongoing for at least decade now - cry that we don't build enough and we don't built fast enough. Pandemic obviously didn't help either. So I don't consider articles like that a bell ringing "sell sell sell". Until we are overwhelmed with new constructions coming up everywhere, there will be more people willing to buy, than to sell. Anecdotally, we decided with wife to pull a trigger on $380k house in Florida (decent ZIP code) just a month before COVID hit, in March 2019. We had 90 days to cancel with $2,500 penalty, pandemic scared us with possibility of builder being lawfully able to be stuck on a construction site for up to 3 years. But eventually we decided to go on because we got tired of renting. By end of 2021 I got offer for $475k, cash, and someone "stole" our plans and our builder built exactly same house next street for $450k (we went inside everything was the same so same options were selected). Then "correction" should come and everyone expected Jan-April 2022 to be a 25% cool off since market rose so much. Well, our "correction" was that prices stopped going up, that's it. Now just few days ago I got an offer by mail (they find your address and mass-mail you) for "amazing amount, just to call". Out of curiosity, I called and was told upon doing title and lean research, an Executive Manager can show up overnight with $525,000 check. Weird times...
tmnvix 4y ago
Cheap and easy credit has driven house prices up with people continuing to pay very large sums only because they anticipate capital gains. Many buyers just want a home but wouldn't pay these prices if capital gains were out of the question. If we reach debt saturation due to higher interest rates or some other economic shock then capital gains are not so certain. In that situation it would be a wondrous trick for prices to somehow 'levitate' and not fall. With investors and home buyers no longer anticipating capital gains - even anticipating falls - what sets the price? I would say two things. For investors, the income potential of the asset - in this case rent. For home buyers, the cost of servicing a loan relative to the cost of renting (with a markup to account for the additional benefits of ownership over renting). What are interest rates now? What were they two years ago (pre-covid)? Price falls are likely to take us back to where we were when we had similar interest rates, perhaps further if sentiment shifts enough. In NZ this is playing out now. 20% down in Auckland city already. That happened within a few months of the peak. 30% would take us to pre-covid prices, but interest rates are likely to reach higher levels than they were then. How long they stay elevated is the million dollar question. Regardless, I think we'll see falls somewhere between 30-50% in NZ in an astonishingly short amount of time. Ireland saw -50% over five years, but that was with the support of global QE and falling rates. EDIT: Of course we just don't know what central banks and politicians will cook up to try to kick this one down the road again. Thankfully, the correction looks almost inevitable this time. Perhaps inflation is the answer - as unpalatable as it is?
asdff 4y ago
OTOH not everyone is crazy and not everyone is participating in this market. The only people playing are those who can afford to pay at these prices. Huge numbers of people are sidelined and can't afford to even put in an offer. IMO either those people on the sidelines manage to save or generate enough to jump into play or prices fall to meet the buyers when there are simply no more high income people who can pay those prices within a given local market, since high income people are ultimately a finite entity given how there are a few and finite amount of high income jobs in a given market to support these payments. Even with remote work shifting that regional effect some, I can't imagine there are enough people migrating to cause crazy long term effects outside of already supply constrained popular places (like Tahoe/other skiing etc).
- gnopgnip 4y ago
  You are participating in the housing market by both owning and renting
  - asdff 4y ago
    Renters aren't really active participants like homeowners and sellers are, they are passively beholden to the market. For example, they aren't actively setting prices the way home buyers do when they try and put in a bid. They are passively setting prices perhaps, but once again the only reason why these drum ups are also possible is because there are renters who are willing to pay at these prices because they are compensated enough to pay these prices. Plenty of people are on the sidelines in this situation too, either in waiting in a rent controlled apartment perhaps, or opting to add another roommate and keep rent low in the face of an increase which also removes this new roommate from entering the market for themselves and contracts further the number of renters who are out shopping for apartments on the market at these prices.
nr2x 4y ago
Eventually, housing costs begin to outstrip income. Starts at the bottom and goes up. In South Bay a quarter million of household income can’t get you a modest family home. Simple single family homes go for $3M.
- wctawcta 4y ago
  It's wild. Single family houses are being listed at $2M-$3M and going for $1M over asking. And the houses would often be considered fairly modest anywhere else in the country. I imagine a lot of buyers can afford this by selling their existing homes. Or perhaps they socked away a huge nest egg during after an IPO or over the duration of the stock market run up. But new homebuyers would need to earn about $750k+/year for the foreseeable future for this to make financial sense. That could be a risky wager over the next few years.
  - nr2x 4y ago
    If I were paying a mortgage with equity rather than salary I’d be nervous right now. There has to be a non trivial amount of people in that situation, and the stock market tanking means some people will not have the planned upon income. Then what?
foolfoolz 4y ago
i agree. and the other paradox i keep thinking about is everyone says houses are too expensive it’ll to buy, but every house sells within 1-2 weeks on the market
- seanmcdirmid 4y ago
  I thought that was weird also until I became a homeowner (in Seattle). There are two other townhomes in my cluster, both are owned but unoccupied most of the time. My neighbors have other homes, one is technically owned by parents in China (who might occupy it someday, my wife is Chinese so chatted about it with the person who occupies it occasionally). It might be totally weird luck, but maybe those houses are being bought by a small segment who are acquiring multiple ones?
onlyrealcuzzo 4y ago
This is exactly like saying if the S&P was 30% higher 3 months ago, clearly it was not wrong. You either believe the market is efficient or you don't.
pasquinelli 4y ago
who's everyone exactly? it's moody's saying that homes in 97% of //cities// are overvalued. or, in other words, moody's is predicting a sudden drop in house prices in basically all american cities. is it not typically the case that, before the price of something goes off a cliff, most people think it's worth the going price? your first sentence is quippy, but i don't think it's saying anything.
t_mann 4y ago
Well, crashes are a real thing, and these guys are in the business of trying to predict them. Let's remember to revisit their statement in five years.
samlevine 4y ago
> If every house is overvalued by some metric, then maybe the metric is wrong. We're seeing people moving, and supply limits are influencing both rental prices and purchase prices. It's a weird housing market. The question of the rationality of the valuation is: 1. Do you expect these migration patterns to continue? 2. If so, when do you expect new construction to pick up the slack for demand? 3. How bad of a recession is the Fed going to cause to break inflation? > housing that should depreciate over time. It does, amusingly. Housing stock ages and units you build now will generally be worth less in 10-20 years. Land is the thing that can appreciate in value.
kderbyma 4y ago
every bubble in history would suggest yes ... then no.

11235813213455 4y ago

I don't know how it works in the US, but in France, when you buy an apartment or house, you pay about 8% to the state (notary / attorney fees), that participates in the inflation I guess

andrewljohnson 4y ago
In the US, you pay about 6.5-7%. You pay 5.5 to 6% to the two agents (buyer and seller agents) and about 1% in closing costs (title insurance, etc). It has always seemed wildly inefficient to me. Especially the “buyer agent” who gets a couple percent entirely for escorting the buyer through homes and submitting an offer.
- BadCookie 4y ago
  The buyer’s agent might show someone dozens of properties all around town and not get a sale. The seller’s agent has it much easier: an almost guaranteed sale, and for what effort? They just hire a photographer, help choose a listing price, and maybe do one open house. I’d rather be a seller’s agent any day.
  - andrewljohnson 4y ago
    My buyer’s agent could be replaced by giving me access to MLS and lockboxes. My seller’s agent, on the other hand, was super useful and irreplaceable except by another smart human. I felt like he got us top dollar for the house based on how he renovated, staged, photographed… much more money than we expected. Also, my experience was I set a budget, put my stuff in truck, left my house a dirty mess, handed the agent my keys, and left town. Then he did all the renovating/etc, posted it, collected offers, and we got paid.

mogadsheu 4y ago

No because houses as an asset class could still be overvalued relative to other assets.

majormajor 4y ago
So a slightly more sophisticated analysis would be "how does housing appreciation in each market compare to stock market appreciation over the same time period" - but the description in the article leaves that out, looking just at historical incomes/costs/rents. In a world where homebuying is increasingly out of reach of a larger percent of people, you'd expect it to be more disconnected with average or median income/rent, and more pegged to higher percentiles.
- nemo44x 4y ago
  I mean, just about every house has an owner that lives in it. Homes are expensive. Most people just can’t afford a big slice of land and home. They have to accept they will have to make do in an apartment that may be shared. Should the home they deserve just magically appear?
  - HWR_14 4y ago
    > just about every house has an owner that lives in it Just under 2/3 of US homes have an owner that lives in it.
    - davidgay 4y ago
      What's the number of owners + long-term renters? (the likely relevant metric when looking at housing price vs local incomes)
      - HWR_14 4y ago
        Ah, that's one of the ways the statistic I quoted is skewed. Short term rentals aren't considered "homes" by it, so it would be 100%.

jeffbee 4y ago

Well, according to the University of Michigan Survey of Consumers, the "buying conditions for houses" index has reached its lowest point since 1982, with 68% of respondents saying it is a bad time to buy in the March 2022 survey. A year ago respondents were equally likely to say that prices were low or high, now 20x more respondents say that prices are high.

spoonjim 4y ago

There are multiple ways to value an asset other than its current price. One is cash flows: if you rented it, how much money would you get? Another is historical norms: if historically a city with N million jobs providing average income X can only support housing prices of Y, then one could conclude that housing is overpriced relative to the ability of people to pay for it.

OrvalWintermute 4y ago
The HCOLA house my wife owns in which we live would rent for ~5,000 a month as it is inside our respective city beltway, in a good school district, in a low crime, historic area. When we got married $5,000 is pretty close to our much smaller apartment rental costs, summed. The vacancy rate is pretty low, and the demand is strong. Like all real estate calculations though, this is completely local.
- refurb 4y ago
  Just look at the price to rent index - 15 to 16 is neutral (renting and owning cost the same). San Francisco is currently 52. In HCOL areas, renting tends to be cheaper than owning because home price reflect not only cash flow, but expected appreciation as well. https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...
scarface74 4y ago
You’re assuming that the people who buy house in an area work in the area. People who are able to work remotely statistically have jobs that pay more. They can live anywhere. A $700K house is a steal for even a mid level person working at BigTech who use to live on the west coast.

Retric 4y ago

Over vs under valued is more a question of stability than current prices. The question is less about today than how risky and how profitable an investment it would likely be relative to other investments.

s5300 4y ago

Not when you have a populace that is by definition average & in need of a place to live/start a family, but have an external investor class of the foreign ultra rich or Wall street douche canoes buying everything up because fuck you & they can. Crazy if you believe most of our nation should be essentially indentured servants for basic housing. Something like that, I think.

mistrial9 4y ago
some economic theorists take this seriously -- BlackRock is Buying Houses made a large headline in daily news here.
fennecfoxen 4y ago
"essentially indentured servants" is a bit rhetorically distracting, don't you think? Let's pin that down. What's a reasonable amount of work that a human should be expected to do to live? Not just housing, but food, and whatever else.
tryptophan 4y ago
Its the Cantillon effect. https://river.com/learn/terms/c/cantillon-effect/ https://river.com/learn/terms/c/cantillon-effect/ Banks will loan some people billions at rates half of which they would give you, if they even gave you a loan. Thus they can buy everything for inflated prices. We need to end the fed.

rufus_foreman 4y ago

>> Isn't this one of those "If everyone is crazy, you're crazy" situations? No. Hopefully you aren't using that justification to do something stupid.

serf 4y ago
>No. just no? group consensus and participation shapes nearly every human endeavor; why do you think that this round-a-bout consensus (97%) is unrelated?
- fennecfoxen 4y ago
  Because for all that today's sales prices are driven by that consensus, you can do math on the expected future income stream (including imputed rent) (adjusting it for interest rates and inflation and risks) and determine that it comes up a bit short by most measures.

pjmorris 4y ago

I think there's a more concrete measure of value: house prices related to income. Historically (Robert Shiller has a chart for the US going back to 1890) house prices (and mortgages and rents) have maintained a stable relationship with income. Occasionally that relationship is strained but it has usually fallen back in line. One exception to this was the extraordinary, ongoing, support to the financial system post-2008. House prices and other financial assets have ballooned in relative proportion to wage income. That's more than a perception of value, that's a matter of social stability as most people depend on the same paycheck for not only housing but food, medicine, etc, as well as housing.

epistasis 4y ago
That would work if the supply of houses has kept up with populations growth, and just as importantly, the desired location of where people want to live. If there's housing scarcity, then prices will rise far ahead of ability to pay. That's the source of a lot of other types of today's inflation, for example, cars.
- state_less 4y ago
  > If there's housing scarcity, then prices will rise far ahead of ability to pay. Housing costs tend toward people's ability to pay, otherwise folks default. That's why the banks ask you about your income and credit worthiness, they want to know you'll be able to pay the mortgage and not default. If money costs increase faster than income, folks won't be able to afford as much money (as high a price).
  - epistasis 4y ago
    Housing costs do tend towards ability to pay, and when there's scarcity, that "ability to pay" starts cutting out those with the lowest incomes, since they do not get the housing. That's how housing costs can increase faster than the income of an area, it's the market displacing those with lower incomes, and readjusting to only house the wealthiest. Add in that housing prices are distinct from the housing costs, and that leases only change rent occasionally, and lots of people are owners and have fixed costs, and prices can rise quite a bit faster than incomes.

discardable_dan 4y ago

Yes and no. I would agree, but housing is, for the most part, fungible (at least for people with tech salaries). If I sold my house, I could pay for rent in my high-cost area for the better part of a decade with just the income off the sale. I am starting to think I might be crazy not to sell and pocket the money: I could rent down the street and pay rent off my salary while that large pile of money collects rent. A house isn't a particularly liquid asset, and half a house worth of liquidity seems like a safer position in the current market.

mrtnmcc 4y ago
Rent has also gone up
- throwaway1777 4y ago
  Not only that; rent can keep going up.
  - forty 4y ago
    And I'll add to that: if you ever have no income (which can happen when you retire for example), at least as a owner you have somewhere to live.
hackerfromthefu 4y ago
Look more than 10 years into the future. 20 years from how as a renter your ongoing costs will be high. 20 years from now as a home owner with the mortgage lower and inflation on everything higher, your ongoing costs will be low. Owning a house is an exercise in deferred gratification, similar to owning most businesses.

brewdad 4y ago

We'll find out over the next 6-12 months. At some point, a lot of home buyers started shopping by payment without regard to total price. With interest rates near their lowest in anyone's lifetimes that was workable. With interest rates rising, as buyers who haven't locked in lower rates begin looking at the current payments on offer, they will have to look at lower priced homes or drop out of the market. If this boom has been driven primarily by buyers flush with cash, foreign or domestic, then prices should remain high. Payments are largely irrelevant to cash buyers. Any buyer using debt will be forced into lowering their ceiling of properties they can afford. Home prices should then fall.

AYBABTME 4y ago
Home prices will fall if rentals fall, otherwise no one will want to sell and low market supply will keep prices where they care. But with rising interest rates, sustained demand for rental can be expected.
conductr 4y ago
The concept of the cash buyer is a bit of a farse as well. What usually takes place is a cash offer. They just need to proof of funds to do this. But then, they get financing to close. Nobody in their right mind is putting that sum of cash in real estate when they could borrow at 2% or whatever it was before the recent run up. The mortgage interest even has favorable tax treatment so it’s effectively much less. Oh and the actual cash can also grow tax deferred. I really don’t understand why you’d actually put a large sum into a house when interest rates were as low as they were.
- djbusby 4y ago
  Only if you had lots (lots!) of excess cash. That is, folk who are diversifying a big portfolio (ie: a 500k home is less than 20% of your total book)
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vmception 4y ago

The money supply expands primarily by debt, and it relies on people paying back the debt with actual value (or dollars representing the actual value). When tightening, there arent enough dollars in circulation to do that. But the bankers get the actual value (homes, collateral, liens on income) regardless. Lenders dont keep seized collateral on their balance sheet, so they sell it at the best price (and they dont need the max price because they already made so much on interest payments). So they push prices down in their firesales. For the tightening money supplt and people trying to find dollars, think of it like the poison map closing in on Call of Duty Warzone. So you can base housing prices on that outcome.

joering2 4y ago

Overvalued not necessarily mean the value of current stock has to drop. This is - an ongoing for at least decade now - cry that we don't build enough and we don't built fast enough. Pandemic obviously didn't help either. So I don't consider articles like that a bell ringing "sell sell sell". Until we are overwhelmed with new constructions coming up everywhere, there will be more people willing to buy, than to sell. Anecdotally, we decided with wife to pull a trigger on $380k house in Florida (decent ZIP code) just a month before COVID hit, in March 2019. We had 90 days to cancel with $2,500 penalty, pandemic scared us with possibility of builder being lawfully able to be stuck on a construction site for up to 3 years. But eventually we decided to go on because we got tired of renting. By end of 2021 I got offer for $475k, cash, and someone "stole" our plans and our builder built exactly same house next street for $450k (we went inside everything was the same so same options were selected). Then "correction" should come and everyone expected Jan-April 2022 to be a 25% cool off since market rose so much. Well, our "correction" was that prices stopped going up, that's it. Now just few days ago I got an offer by mail (they find your address and mass-mail you) for "amazing amount, just to call". Out of curiosity, I called and was told upon doing title and lean research, an Executive Manager can show up overnight with $525,000 check. Weird times...

tmnvix 4y ago

Cheap and easy credit has driven house prices up with people continuing to pay very large sums only because they anticipate capital gains. Many buyers just want a home but wouldn't pay these prices if capital gains were out of the question. If we reach debt saturation due to higher interest rates or some other economic shock then capital gains are not so certain. In that situation it would be a wondrous trick for prices to somehow 'levitate' and not fall. With investors and home buyers no longer anticipating capital gains - even anticipating falls - what sets the price? I would say two things. For investors, the income potential of the asset - in this case rent. For home buyers, the cost of servicing a loan relative to the cost of renting (with a markup to account for the additional benefits of ownership over renting). What are interest rates now? What were they two years ago (pre-covid)? Price falls are likely to take us back to where we were when we had similar interest rates, perhaps further if sentiment shifts enough. In NZ this is playing out now. 20% down in Auckland city already. That happened within a few months of the peak. 30% would take us to pre-covid prices, but interest rates are likely to reach higher levels than they were then. How long they stay elevated is the million dollar question. Regardless, I think we'll see falls somewhere between 30-50% in NZ in an astonishingly short amount of time. Ireland saw -50% over five years, but that was with the support of global QE and falling rates. EDIT: Of course we just don't know what central banks and politicians will cook up to try to kick this one down the road again. Thankfully, the correction looks almost inevitable this time. Perhaps inflation is the answer - as unpalatable as it is?

asdff 4y ago

OTOH not everyone is crazy and not everyone is participating in this market. The only people playing are those who can afford to pay at these prices. Huge numbers of people are sidelined and can't afford to even put in an offer. IMO either those people on the sidelines manage to save or generate enough to jump into play or prices fall to meet the buyers when there are simply no more high income people who can pay those prices within a given local market, since high income people are ultimately a finite entity given how there are a few and finite amount of high income jobs in a given market to support these payments. Even with remote work shifting that regional effect some, I can't imagine there are enough people migrating to cause crazy long term effects outside of already supply constrained popular places (like Tahoe/other skiing etc).

gnopgnip 4y ago
You are participating in the housing market by both owning and renting
- asdff 4y ago
  Renters aren't really active participants like homeowners and sellers are, they are passively beholden to the market. For example, they aren't actively setting prices the way home buyers do when they try and put in a bid. They are passively setting prices perhaps, but once again the only reason why these drum ups are also possible is because there are renters who are willing to pay at these prices because they are compensated enough to pay these prices. Plenty of people are on the sidelines in this situation too, either in waiting in a rent controlled apartment perhaps, or opting to add another roommate and keep rent low in the face of an increase which also removes this new roommate from entering the market for themselves and contracts further the number of renters who are out shopping for apartments on the market at these prices.

nr2x 4y ago

Eventually, housing costs begin to outstrip income. Starts at the bottom and goes up. In South Bay a quarter million of household income can’t get you a modest family home. Simple single family homes go for $3M.

wctawcta 4y ago
It's wild. Single family houses are being listed at $2M-$3M and going for $1M over asking. And the houses would often be considered fairly modest anywhere else in the country. I imagine a lot of buyers can afford this by selling their existing homes. Or perhaps they socked away a huge nest egg during after an IPO or over the duration of the stock market run up. But new homebuyers would need to earn about $750k+/year for the foreseeable future for this to make financial sense. That could be a risky wager over the next few years.
- nr2x 4y ago
  If I were paying a mortgage with equity rather than salary I’d be nervous right now. There has to be a non trivial amount of people in that situation, and the stock market tanking means some people will not have the planned upon income. Then what?

foolfoolz 4y ago

i agree. and the other paradox i keep thinking about is everyone says houses are too expensive it’ll to buy, but every house sells within 1-2 weeks on the market

seanmcdirmid 4y ago
I thought that was weird also until I became a homeowner (in Seattle). There are two other townhomes in my cluster, both are owned but unoccupied most of the time. My neighbors have other homes, one is technically owned by parents in China (who might occupy it someday, my wife is Chinese so chatted about it with the person who occupies it occasionally). It might be totally weird luck, but maybe those houses are being bought by a small segment who are acquiring multiple ones?

onlyrealcuzzo 4y ago

This is exactly like saying if the S&P was 30% higher 3 months ago, clearly it was not wrong. You either believe the market is efficient or you don't.

pasquinelli 4y ago

who's everyone exactly? it's moody's saying that homes in 97% of //cities// are overvalued. or, in other words, moody's is predicting a sudden drop in house prices in basically all american cities. is it not typically the case that, before the price of something goes off a cliff, most people think it's worth the going price? your first sentence is quippy, but i don't think it's saying anything.

t_mann 4y ago

Well, crashes are a real thing, and these guys are in the business of trying to predict them. Let's remember to revisit their statement in five years.

samlevine 4y ago

> If every house is overvalued by some metric, then maybe the metric is wrong. We're seeing people moving, and supply limits are influencing both rental prices and purchase prices. It's a weird housing market. The question of the rationality of the valuation is: 1. Do you expect these migration patterns to continue? 2. If so, when do you expect new construction to pick up the slack for demand? 3. How bad of a recession is the Fed going to cause to break inflation? > housing that should depreciate over time. It does, amusingly. Housing stock ages and units you build now will generally be worth less in 10-20 years. Land is the thing that can appreciate in value.

kderbyma 4y ago

every bubble in history would suggest yes ... then no.