4 ms·

I think I follow, but I'm not sure if you're capturing all the factors. For example, let's say you lived in Canada and bought a house 4 years ago for $300k wi

I think I follow, but I'm not sure if you're capturing all the factors. For example, let's say you lived in Canada and bought a house 4 years ago for $300k with a 5 year 3% mortgage. You can't get a 30 year mortgage in Canada, the banks won't underwrite a loan that long. So you will have to enter a new loan next year, and lets say it will be at 6%. Your payments change, going up significantly. You might have to put the house on the market if you can't afford the new payments. In the U.S. that same person would have had the option for a 30 year fixed rate government backed mortgage at a 3% interest rate, with only 3-5% down. They don't have to refinance in 5 years=, like in other countries. If interest rates go up, and they had nowhere else to go, their mortgage will not increase. How could these government subsidies not be contributing some amount to an increase in housing costs? Doesn't that make it harder for people coming later to afford housing, since housing has increased in price so much faster than wages?

robocat 4y ago
Sure, in the short term, changes can put individuals under water. But I am actually talking about how the market moves. Let’s ignore investors (they matter, but that complicates the argument). If you have 10 houses and 20 people want a house, then the 10th person sets the minimum price, and they bid a price on the house so that they can only just afford a mortgage. 10 people miss out on a house because they are unaffordable, however the minimum house price was set by the 10th buyer who can only just fucking afford their mortgage payments (mostly interest). So minimum house prices depend on the earnings of the marginal buyer that can just afford a house. That marginal buyer is usually somewhere near median wages, so there is a lot of demand just below that price point, and no house will go for much cheaper because for most people it is better to own a shitty house than to rent. Over the long term, the interest rate is almost irrelevant, because house prices are caused by interest rates. There are a lot of misconceptions about house pricing - it needs to be looked at as a system - not from an individual’s point of view.
- mikem170 4y ago
  I think that I follow what you are saying, but what happens now that first time buyers have to pay higher interest rates, and can't afford a large enough loan to tempt sellers out of the low-rate 30 year fixed mortgages that they are currently paying? In Canada everyone has to refinance every 5 years. I assume there will be more liquidity in their housing market over the few couple years than there will be in the U.S., and that their prices are more free to adjust to current conditions. I have difficulty seeing how government backed mortgages don't distort the market? It's such a high percentage of first time home buyers that receive these subsidies, and then those owners benefit when they can roll that extra equity into their next house at higher prices, while at the same time these higher prices mean that it becomes harder and harder for future first time buyers, especially now that rates are coming off long term historic lows. I've assumed these subsidies are one of the reasons why housing costs have grown so much faster than inflation and wages, helping those who got in a while ago and could ride the wave.
  - robocat 4y ago
    Let’s stick with the model of 10 houses with 20 people that want a house, and add some spherical assumptions: zero deposit, zero maintenance, zero taxes. 10 people above the median wage will get a house, and 10 people below the median wage don’t get a house. Let’s say Bob earns the median wage and Bob can just afford to spend $50k on mortgage costs. Assuming an interest only mortgage: if mortgage rates are 10% then Bob can bid somewhere around $500k for a house, but if mortgage rates are 4% then Bob can bid somewhere around $1250k. But fundamentally the same 10 people get the 10 houses, and the same other 10 people miss out. If we add in principal, taxes and maintenance: over a 30 year period Bob pays the same amount because Bob has bid the house price up to what he could only just afford. The amount Bob can only just afford is fixed by Bob’s income, so the amount Bob can afford is the constraint on what the lowest house price becomes due to his bidding. That result is because the median buyer had to bid as much as they could afford, so house prices are caused by mortgage costs. The other 10 that got houses were bidding against each other, so they also pay as much as they can afford. Interest rates change the mixture of payments, but they don’t make those 10 houses more or less affordable. If rates double in the long term then house prices should halve in the long term. In the short term with higher mortgage rates, most people stay in the home they have with the mortgage they have, and fewer houses transact. Is there a housing shortage? Firstly most people are living somewhere, so perhaps there is already enough housing? Alternatively most people want a better place than where they are living, so there can never be enough housing? There are many places in the first world where there is enough housing, so the least wanted house will sell for $0. Yet high demand areas can perhaps never have enough housing? If New York doubled it’s housing tomorrow, how long before it would be back to the same prices? A higher interest rate environment could possibly help the less well off, because they can save for a bigger deposit quicker? All the different dynamics require some deeper analysis to determine what is actually happening. There is a lot of misinformation and common wild misunderstandings about how the market dynamics actually affect us. I will add two real world observations. Firstly, only a single digit percentage of homes are sold each year, so houses price expectations are set by a relatively small number of house purchases. A few years ago in Christchurch, New Zealand, auctions changed from nobody bidding on most houses to crazy crazy bidding. The economy didn’t really change, so there was a herd problem with housing prices. Certainly the economy didn’t get better by 30%, but house prices changed that much. Secondly, an anecdote that mortgages drive house prices: I bought a house in Christchurch for less than half price of the equivalent house up the road. In 2010 we had a severe earthquake in Christchurch, which left many houses uninsurable. Some homes were perfectly safe (could be rented) but were uninsurable for technical policy reasons. Genreally you can’t get a mortgage on an uninsurable house, so in Christchurch we could see the situation where two equivalent houses would go for wildly different prices, because house prices are mostly driven by mortgages. The rental yield on my property would theoretically be high so investors should have bid on it, but they didn’t: maybe because small investors had already spent their money buying houses, and maybe corporate investors felt it was a risky market due to earthquake risk?

robocat 4y ago

Sure, in the short term, changes can put individuals under water. But I am actually talking about how the market moves. Let’s ignore investors (they matter, but that complicates the argument). If you have 10 houses and 20 people want a house, then the 10th person sets the minimum price, and they bid a price on the house so that they can only just afford a mortgage. 10 people miss out on a house because they are unaffordable, however the minimum house price was set by the 10th buyer who can only just fucking afford their mortgage payments (mostly interest). So minimum house prices depend on the earnings of the marginal buyer that can just afford a house. That marginal buyer is usually somewhere near median wages, so there is a lot of demand just below that price point, and no house will go for much cheaper because for most people it is better to own a shitty house than to rent. Over the long term, the interest rate is almost irrelevant, because house prices are caused by interest rates. There are a lot of misconceptions about house pricing - it needs to be looked at as a system - not from an individual’s point of view.

mikem170 4y ago
I think that I follow what you are saying, but what happens now that first time buyers have to pay higher interest rates, and can't afford a large enough loan to tempt sellers out of the low-rate 30 year fixed mortgages that they are currently paying? In Canada everyone has to refinance every 5 years. I assume there will be more liquidity in their housing market over the few couple years than there will be in the U.S., and that their prices are more free to adjust to current conditions. I have difficulty seeing how government backed mortgages don't distort the market? It's such a high percentage of first time home buyers that receive these subsidies, and then those owners benefit when they can roll that extra equity into their next house at higher prices, while at the same time these higher prices mean that it becomes harder and harder for future first time buyers, especially now that rates are coming off long term historic lows. I've assumed these subsidies are one of the reasons why housing costs have grown so much faster than inflation and wages, helping those who got in a while ago and could ride the wave.
- robocat 4y ago
  Let’s stick with the model of 10 houses with 20 people that want a house, and add some spherical assumptions: zero deposit, zero maintenance, zero taxes. 10 people above the median wage will get a house, and 10 people below the median wage don’t get a house. Let’s say Bob earns the median wage and Bob can just afford to spend $50k on mortgage costs. Assuming an interest only mortgage: if mortgage rates are 10% then Bob can bid somewhere around $500k for a house, but if mortgage rates are 4% then Bob can bid somewhere around $1250k. But fundamentally the same 10 people get the 10 houses, and the same other 10 people miss out. If we add in principal, taxes and maintenance: over a 30 year period Bob pays the same amount because Bob has bid the house price up to what he could only just afford. The amount Bob can only just afford is fixed by Bob’s income, so the amount Bob can afford is the constraint on what the lowest house price becomes due to his bidding. That result is because the median buyer had to bid as much as they could afford, so house prices are caused by mortgage costs. The other 10 that got houses were bidding against each other, so they also pay as much as they can afford. Interest rates change the mixture of payments, but they don’t make those 10 houses more or less affordable. If rates double in the long term then house prices should halve in the long term. In the short term with higher mortgage rates, most people stay in the home they have with the mortgage they have, and fewer houses transact. Is there a housing shortage? Firstly most people are living somewhere, so perhaps there is already enough housing? Alternatively most people want a better place than where they are living, so there can never be enough housing? There are many places in the first world where there is enough housing, so the least wanted house will sell for $0. Yet high demand areas can perhaps never have enough housing? If New York doubled it’s housing tomorrow, how long before it would be back to the same prices? A higher interest rate environment could possibly help the less well off, because they can save for a bigger deposit quicker? All the different dynamics require some deeper analysis to determine what is actually happening. There is a lot of misinformation and common wild misunderstandings about how the market dynamics actually affect us. I will add two real world observations. Firstly, only a single digit percentage of homes are sold each year, so houses price expectations are set by a relatively small number of house purchases. A few years ago in Christchurch, New Zealand, auctions changed from nobody bidding on most houses to crazy crazy bidding. The economy didn’t really change, so there was a herd problem with housing prices. Certainly the economy didn’t get better by 30%, but house prices changed that much. Secondly, an anecdote that mortgages drive house prices: I bought a house in Christchurch for less than half price of the equivalent house up the road. In 2010 we had a severe earthquake in Christchurch, which left many houses uninsurable. Some homes were perfectly safe (could be rented) but were uninsurable for technical policy reasons. Genreally you can’t get a mortgage on an uninsurable house, so in Christchurch we could see the situation where two equivalent houses would go for wildly different prices, because house prices are mostly driven by mortgages. The rental yield on my property would theoretically be high so investors should have bid on it, but they didn’t: maybe because small investors had already spent their money buying houses, and maybe corporate investors felt it was a risky market due to earthquake risk?