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The comment is implying that fixed rate debt below inflation is "free" money. Rate at 2% and inflation at 3% means an effective gain of 1% a year on the spread.
by adam_arthur 4y ago
The comment is implying that fixed rate debt below inflation is "free" money. Rate at 2% and inflation at 3% means an effective gain of 1% a year on the spread.
It's wrong though. Home prices are likely to fall quite substantially if you actually look at all the fundamental data and cast it in the light of significantly higher mortgage rates.
Higher inflation also raises the risk free rate which devalues assets. The stronger effect of the two will win out, and with valuations multiple standard deviations above the mean, the end result is pretty clear
- almost_usual 4y agoIf rents continue to rise home prices won’t fall substantially. https://fred.stlouisfed.org/series/CUUR0000SEHA https://fred.stlouisfed.org/series/CUUR0000SEHA
- gedy 4y agoI honestly feel like rents are at the breaking point, it's ridiculous in California at least and people I know who rent are leaving the state because of this.
- bredren 4y agoIn 2021, Portland, Oregon saw it’s population decline for the first time since 2010. This has been attributed to the high cost of housing. [1] The secretary of HUD was here a month ago taking a tour, talking about affordable housing. We started a family last year and despite needing to move out of a duplex, we would not seriously consider a purchase. Prices and terms of sale have been outrageous. Deciding our best bet was to rent, we found the rental market for single family homes a disaster. The only way we found something was because we know a postal worker who saw a for rent sign while walking their route. The place never hit the internet. The house needs a ton of work and the only way it can be priced the way it is is because the market is so totally busted. My wife tracked pricing and made a spreadsheet of comparable rentals when we signed the lease. I’d guess our rent was at least $400 under market. I grew up in Portland. I went to a portland public school and college in Oregon. I had wanted to live here. However, we need housing to show clear indications it will turn, an unexpected windfall, or we will move away from family here and toward other family in the mid-west. Regular people are desperate here, valley folks are coming in doing the same thing we would do to wherever we could land in the Midwest. Housing is broken. [1] https://www.wweek.com/news/city/2022/05/27/new-census-numbers-show-portlands-population-dropped-by-over-11000-people-from-2020-to-2021/ https://www.wweek.com/news/city/2022/05/27/new-census-number...
- zbrozek 4y agoWe need supply side solutions. The market would totally take care of demand if property rights were strong enough to allow folks to build housing. We need to get a federal level right to build housing on your land. We also need to overturn Euclid v Ambler.
- trashtester 4y agoThis year could possibly the worst time in a lifetime to start bulding a new home.
- zbrozek 4y agoUntil next year! It doesn't get better.
- trashtester 4y agoWell, consider that if you start building now, you're likely not done until next year, or maybe the year after....
- zbrozek 4y agoI'm more than 2 years in and no physical progress has been made. "Local control" is a huge problem and it needs to go away.
- jjeaff 4y agoThe real question is how quickly is someone else renting their place after they leave. I have also known quite a few people have recently left California. And not a single one of them left a vacant house behind.
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- rcpt 4y agoThere's no reason for rents to rise and I'd argue that even current rents are overpriced. Urban offices aren't filling up and essential workers have less money than ever.
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- topkai22 4y agoRising interest rates drive up the mortgage rates. The vast majority of US home buyers have to finance their purchases, so an increase in mortgage rates is effectively an increase in the total cost of buying a house. The total cost of homeownership is correlated to rental markets, as we are talking about different ways of consuming the same good. Interest rates have gone from 2.75 to 5.4%, meaning monthly payments on purchases have gone up almost 40%. Not all that will transfer to the rental market, but I be surprised if rents don’t continue to go up; barring a general collapse in house prices.
- qqqwerty 4y agoThat is not how rent prices work. It is pretty much supply and demand. No one cares how much your financing costs. If people start losing their jobs because the FED induces a recession, that means less money for rent. Younger folks move back in with their parents. People take on an extra roommate or two. Demand for rental units goes down. Prices go down. If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it.
- w14 4y ago> If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it. Purely anecdotally, a large proportion of the housing available for sale in Plymouth (UK) seems to be rental property. Tenants are being thrown out while landlords sell up. I have been wondering if the drive to cash out at a time when holding cash isn't necessarily such a great idea is exactly what you suggest - that those with buy-to-let mortgages are looking at the potential of interest rates rising faster than rents.
- adam_arthur 4y agoRents expanded quickly due to massive increase in disposable income from government programs leading to expansion of number of households. Now that real incomes have been falling rapidly for months, we can expect household contraction and rent stagnation or decline.
- paxys 4y agoThose who bought homes 2-3 years ago when 30 year fixed mortgage rates dipped below 3% have already seen their values go up like 30-40%. There is no reason to expect it to crash by that much in the next few years, if ever.
- nathanvanfleet 4y ago"Prices have skyrockets in the past two years, but it's impossible for an equal price change in the negative direction though"
- paxys 4y agoPossible does not mean guaranteed. Yes prices could go down. But just because they have gone up x% doesn't mean they have to go down x% as well.
- adam_arthur 4y agoIt's happened before and it will likely happen again, barring rapid and unexpected disinflation. FL fell 60% in the 2000s, and I wouldn't be surprised to see 40% this time around
- JackFr 4y agoThe Fed pushed a trillion or so of free money into mortgage markets. That is why house price went up. They have stopped. Prices will likely come down. While there are likely supply constraints at the margins, the house price gains have been a result of the amount you can borrow at a certain monthly payment being abnormally high.
- trashtester 4y agoThat depends on the fed. If they raise rates enough to kill inflation, we could have 2008 all over again, possibly worse. But if inflation remains high, the nominal price of the house may go up further.
- andrewla 4y ago> There is no reason to expect it to crash by that much in the next few years, if ever. Was there a reason to expect it to happen in the first place? Aside from ex post facto reasoning? Housing is a tough market to crash because people need to live somewhere, so if prices fall people just avoid moving, and liquidity drops. For prices to fall substantially requires that people express a liquidity preference -- they'd rather have the money, even discounted, then keep the house. And the primary way that happens is that people can no longer afford to service their mortgages. This doesn't happen easily, but when it happens, things can break very dramatically.
- hackererror404 4y agoFrom what I've heard there is a massive supply issue. Rates will only fall if supply increases or if demand drops. From what I've heard, the demand isn't expected to fall and there are limits in the supply side of things due to all sorts of issues many stemming from covid and the long recession we had on the housing market post crash of 2008. Ideally demand will go down because things as it stands are just not affordable to most. The rent also is going way up, so that drives housing prices too.
- tmnvix 4y agoWe had an 'undersupply' problem in NZ until very recently. It seemed like it was all the media ever talked about. Then inflation hit, rates went up, and property prices started declining rapidly (current rate of decline looks like NZD5000/w on a median priced home over the past few months). Suddenly, the number of properties on the market is up 2-3x in the major cities and available rentals have doubled in places. Rents are falling even as commentators claim landlords will try to pass on their increased holding costs to their tenants. Where have those properties all come from? Consider that all properties are either investments or owner-occupied. By definition owner-occupiers don't keep empty (or underutilised properties - assuming second homes and holiday homes can be categorised as investments). Therefore, if there are more investors active (or more correctly, investment properties) in the market, the proportion of empty or underutilised homes is going to be higher. Investment activity in the market has undoubtedly been increasing for some time. What appears to be happening is that our underutilised housing stock is now being revealed as investors panic. The same thing happened in Ireland during the GFC. There are many reasons investors will leave properties empty or underutilised during a speculative boom (renovating to flip, on the market, good old fashioned landbanking, a convenient city pad or holiday home, etc). There is much more of this about than people realise. I am very confident that rising interest rates are going to turn out to be a good thing for renters and first time buyers. It'll just take a bit of time and some economic upheaval.
- jseban 4y agoThere's a lot of flexibility in how much living space a person is using also, it's an order of magnitude difference depending on how much money they have. People used to live a whole family in a one room apartment, and now we have single divorced boomers living in whole houses alone. I think people adjust a lot here depending on the economy
- nostromo 4y agoRaising interest rates can increase the costs of housing. (Not the sticker price, the cost.) Fewer developers will build new apartment buildings because financing is getting much more expensive. Fewer new apartments with a growing population means rents will not be getting cheaper unless we have a deep recession and lots of people lose their jobs entirely. Same goes for housing -- fewer houses will be built by builders. Existing housing prices will probably go down, but the people buying them with mortgages will pay just as much, if not more for them each month because debt is getting more expensive. But instead of that money going to the old owner, it'll go to the lender.
- Sammi 4y agoIt depends on what your time horizon is. If you look short term, then anything can be the case at any point of time. Short term is volatile and you can be up and down at any moment. However if you look long term then housing inflation out paces interest rates. This is always the case. So taking a 30 year loan with low rates is a pretty safe bet that you will come out on top over this long term time period.
- taylodl 4y agoI thought home prices were high because new home construction fell off a cliff after the 2008 market crash and has never fully recovered - thus leaving a massive shortage of homes and the Millennials (i.e. Baby Boom 2) generation now reaching the age where they want homes for their kids. Low supply + high demand = high prices. Don't see that changing anytime soon. What we should expect from higher mortgage rates (what I as an old-timer would call "normal" mortgage rates) would be a cooling off on prices. We're already seeing that happening. That's an example of how high rates combat inflation. Your food and energy costs may be soaring but housing costs have just been brought in check.