5 ms·

Demand is people moving to the Bay Area for work and needing to live somewhere, wanting to have kids, etc. It’s not driven by Fed policies around interest rate

by zamfi 4y ago

Demand is people moving to the Bay Area for work and needing to live somewhere, wanting to have kids, etc. It’s not driven by Fed policies around interest rates. It’s not driven by speculation. It’s driven by people wanting to own homes. Period. The other factors are small.

lazide 4y ago
People always want a nicer house in a nicer area. That doesn’t create real demand on it’s own (as in anything that will impact a market). As any experienced realtor will tell you, every house is always ‘in demand’ by a near infinite amount of people that can’t afford it. They have to be able to do something about that desire in a concrete way - high salaries count of course, but it’s always modulated by interest rates unless they are buying cash outright. Then it’s usually moderated less directly by other things they can be doing with that cash that are more interesting, and relative rents in the area.
- zamfi 4y ago
  Again, I am not saying those other factors do not matter, obviously they do. But if it was "interest rates" driving everything -- then every area would be very expensive, not just the areas where there are high salaries and lots of inflow and basically zero new construction. The Bay Area population grew 7.4% from 2010 to 2020 -- that's 614,901 residents according to census. New construction in that same time period was under 200,000 units. So: where are all those people living? Many of them are living with roommates, etc., and because of the scarcity of housing, having your own place has become a luxury that costs extra money. If 600k people are complying for 200k units, prices will go up regardless of what interest rates do. Then, salaries rise in response where they can, because tech companies need to pay enough for people to be able to move here (always more expensive, thanks to rent control and Prop. 13, than already living here) -- which then pushes home prices even higher, because there still isn't enough housing to go around, and the 30% of people who can bid the most are the ones who clear the market. (And then, of course, everyone else who isn't pulling in tech salaries is just shut out of the market.) Interest rates matter on the margin, yes, of course -- but the cost of capital is still low compared with availability. A couple making $400k combined is going to be able to bid more on a house at 3% interest than at 5% interest, but the only reason they're bidding so much at all is that there aren't enough homes to go around and they want one.
  - lazide 4y ago
    Every area in the United States (and every major city) has gotten a lot more expensive! This tracks prices nationwide [https://fred.stlouisfed.org/series/CSUSHPINSA https://fred.stlouisfed.org/series/CSUSHPINSA] Everything else you’re talking about is from side effects.
    - zamfi 4y ago
      We’re talking past each other. Every area has seen an increase in price, yes. But not every area is very expensive. The fact that a house in SF that costs $2m would go for $500k elsewhere is not a result of federal monetary policy, and it is not a result of construction costs. It is a result of supply and demand.
      - lazide 4y ago
        That’s not what I’m referring to at all. If the house in the sticks is $500k and the ‘same’ house is $2m in SF, my point is that without the fed pump, that house in the sticks may be $200k, and the house in SF $800k.
        zamfi 4y ago
        I guess, but that graph you’ve been sharing isn’t super convincing. Mortgage rates have been dropping pretty consistently since the late 80s but price growth isn’t super consistent: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US Money was super cheap 2008-2013 too but prices were down on that period.
        lazide 4y ago
        Because of the ‘08 blow up caused massive restrictions in underwriting standards and willingness of lenders to pipe that easy fed cash through mortgages, which restricted the flow of cash in the following years. It caught up a couple years later though. They had started to raise rates in late ‘06 and ‘07, which ‘pulled the string’ and led to the explosion. (The tide went out, and it turns out a great many people were swimming naked, to abuse a Buffett quote). [https://images.app.goo.gl/RXGY22drR2pfCXX68 https://images.app.goo.gl/RXGY22drR2pfCXX68] Real estate is highly illiquid and often highly leveraged. It often takes years for market changes to be visible in the data, and sometimes pricing signals get hidden entirely in many markets (you’ll see a backlog that can be years long, but no price drops - just no sales). It’s also market dependent, but influenced by the larger market (so think of each specific market as a ship, floating on the overall tide which is ‘cost of money/debt’). Agents tend to always be selling, and tend to hide bad numbers. The Economists working for realtors are especially bad for this. Sellers tend to not want to admit they’re desperate, and can often hold out for years. Buyers always complain that things aren’t cheap enough, but It makes for noisy data and sudden surprises. The short sale I bought in ‘09 for instance, closed for 50% less than the initial offer AT THE BANKS INSISTENCE because of steady shifts in underwriting and appraisal standards in the approx. 5 months it took to close. It took another 6 months before that price signal got disclosed publicly.

by zamfi 4y ago

lazide 4y ago

People always want a nicer house in a nicer area. That doesn’t create real demand on it’s own (as in anything that will impact a market). As any experienced realtor will tell you, every house is always ‘in demand’ by a near infinite amount of people that can’t afford it. They have to be able to do something about that desire in a concrete way - high salaries count of course, but it’s always modulated by interest rates unless they are buying cash outright. Then it’s usually moderated less directly by other things they can be doing with that cash that are more interesting, and relative rents in the area.

zamfi 4y ago
Again, I am not saying those other factors do not matter, obviously they do. But if it was "interest rates" driving everything -- then every area would be very expensive, not just the areas where there are high salaries and lots of inflow and basically zero new construction. The Bay Area population grew 7.4% from 2010 to 2020 -- that's 614,901 residents according to census. New construction in that same time period was under 200,000 units. So: where are all those people living? Many of them are living with roommates, etc., and because of the scarcity of housing, having your own place has become a luxury that costs extra money. If 600k people are complying for 200k units, prices will go up regardless of what interest rates do. Then, salaries rise in response where they can, because tech companies need to pay enough for people to be able to move here (always more expensive, thanks to rent control and Prop. 13, than already living here) -- which then pushes home prices even higher, because there still isn't enough housing to go around, and the 30% of people who can bid the most are the ones who clear the market. (And then, of course, everyone else who isn't pulling in tech salaries is just shut out of the market.) Interest rates matter on the margin, yes, of course -- but the cost of capital is still low compared with availability. A couple making $400k combined is going to be able to bid more on a house at 3% interest than at 5% interest, but the only reason they're bidding so much at all is that there aren't enough homes to go around and they want one.
- lazide 4y ago
  Every area in the United States (and every major city) has gotten a lot more expensive! This tracks prices nationwide [https://fred.stlouisfed.org/series/CSUSHPINSA https://fred.stlouisfed.org/series/CSUSHPINSA] Everything else you’re talking about is from side effects.
  - zamfi 4y ago
    We’re talking past each other. Every area has seen an increase in price, yes. But not every area is very expensive. The fact that a house in SF that costs $2m would go for $500k elsewhere is not a result of federal monetary policy, and it is not a result of construction costs. It is a result of supply and demand.
    - lazide 4y ago
      That’s not what I’m referring to at all. If the house in the sticks is $500k and the ‘same’ house is $2m in SF, my point is that without the fed pump, that house in the sticks may be $200k, and the house in SF $800k.
      - zamfi 4y ago
        I guess, but that graph you’ve been sharing isn’t super convincing. Mortgage rates have been dropping pretty consistently since the late 80s but price growth isn’t super consistent: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US Money was super cheap 2008-2013 too but prices were down on that period.
        lazide 4y ago
        Because of the ‘08 blow up caused massive restrictions in underwriting standards and willingness of lenders to pipe that easy fed cash through mortgages, which restricted the flow of cash in the following years. It caught up a couple years later though. They had started to raise rates in late ‘06 and ‘07, which ‘pulled the string’ and led to the explosion. (The tide went out, and it turns out a great many people were swimming naked, to abuse a Buffett quote). [https://images.app.goo.gl/RXGY22drR2pfCXX68 https://images.app.goo.gl/RXGY22drR2pfCXX68] Real estate is highly illiquid and often highly leveraged. It often takes years for market changes to be visible in the data, and sometimes pricing signals get hidden entirely in many markets (you’ll see a backlog that can be years long, but no price drops - just no sales). It’s also market dependent, but influenced by the larger market (so think of each specific market as a ship, floating on the overall tide which is ‘cost of money/debt’). Agents tend to always be selling, and tend to hide bad numbers. The Economists working for realtors are especially bad for this. Sellers tend to not want to admit they’re desperate, and can often hold out for years. Buyers always complain that things aren’t cheap enough, but It makes for noisy data and sudden surprises. The short sale I bought in ‘09 for instance, closed for 50% less than the initial offer AT THE BANKS INSISTENCE because of steady shifts in underwriting and appraisal standards in the approx. 5 months it took to close. It took another 6 months before that price signal got disclosed publicly.