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I had an interesting thought. I was in the market to buy a house during like... 2019-2021. What "was supposed to be" say... a $450k 3/2 house became $540k duri

I had an interesting thought. I was in the market to buy a house during like... 2019-2021. What "was supposed to be" say... a $450k 3/2 house became $540k during "the COVID pandemic housing gold rush" when rates were 3.25% with everybody bored, willing to have a bidding war (low supply, high demand... how all of these families were able to afford what felt like $200k inflated prices, I guess because of the "funny money" equity inflation in their house and they just rolled it over?) (Unrelated but Zillow says at 7.5% interest rates that house is now $750k+, weird... makes no sense... counter-intuitive, except for how tight the supply/demand situation must be) Long story short... I never made that move. I kept renting. Probably "below my means". Then I put a bunch of money into a money market fund that yields 5%. So... the Fed is raising rates to 5% to try and slow inflation. But now I'm earning 5% on a bunch of money to the point that it basically offsets my rent. So now I have more money to spend/am less financially "tight"... doesn't that contribute to inflation? me having an "oversupply" of money will increase my demand for... travel, frivolous purchases (which was the original problem when business owners got more than what they needed influx wise with PPP loans, or consumers getting "covid relief" and then spending it on things that trickled up to business owners, etc.)

UncleOxidant 3y ago
> So... the Fed is raising rates to 5% to try and slow inflation. But now I'm earning 5% on a bunch of money to the point that it basically offsets my rent. ... doesn't that contribute to inflation? I don't think your case is all that common. The vast majority of people don't have that much money such that they could earn say $1500+/month with rates at 5%. Offsetting you are a whole lot of people who only have a few thousand dollars available in case of emergency and many more who don't even have that. (that said, I'm really enjoying making 5.5% on tbills.)
- pimlottc 3y ago
  I’m not a finance expert but don’t you need something like $350000 in the bank to make $1500/mo in interest? https://www.calculator.net/interest-calculator.html?cstartingprinciple=350%2C000&cannualaddition=0&cmonthlyaddition=0&cadditionat1=beginning&cinterestrate=5&ccompound=annually&cyears=5&cmonths=0&ctaxtrate=0&cinflationrate=3&printit=0&x=Calculate#interestresults https://www.calculator.net/interest-calculator.html?cstartin...
  - UncleOxidant 3y ago
    Yep. In a CD or a money market account of some sort. 26 week to 1 year Treasury bills are paying around 5.5%.
  - wenc 3y ago
    Wouldn't most people with $350k and long investment horizon rather invest that in stocks? (actually asking, I have not idea, just a notion). $350k seems like a lot of money to leave in a money market account as opposed to in a diversified portfolio of stocks/bonds in a tax advantaged account. I'm thinking long term growth. Inflation rates go up and down (i-bonds were not attractive until recently) and so do interest rates. The current 5% rate may not last for long.
    - UncleOxidant 3y ago
      If I got a $350K windfall right now I'd probably put about 70% of it into tbills (6 month to 1 year paying ~5.5% right now) and another 20% into 2 to 5 year treasury notes (paying ~4.7% right now) with the remainder going into an S&P 500 ETF like VOO. I'd DCA into stocks & etfs as the tbills matured. You're right, these 5% rates probably won't last long (though some pundits are saying we're going to be seeing 6+% due to high demand and stubborn inflation so who knows...) but a 5.5% yield on ultra safe treasuries is too hard to pass up right now plus there's no state tax on that interest.
- happytiger 3y ago
  Don’t be overwhelmed by this response. I recently learned that the 1000 bucks thing is mostly based on Bankrates annual survey and it’s not actually true that they don’t have access to 1k, so this is a little bit an exploration. > American households, on average, have $41,600 in savings, according to data last collected by the Federal Reserve in 2019. And that’s before the free money era and the explosion of wealth from rising interest rates. Of course it’s also true that inflation could be taking a bite out of household wealth. https://time.com/personal-finance/article/average-american-savings-account-balance/#:~:text=American%20households%2C%20on%20average%2C%20have,according%20to%20the%20same%20data https://time.com/personal-finance/article/average-american-s.... People may not have enough saved for retirement, but that’s a separate issue. The surveys of people not having cash on hand to handle a 1000 emergency or whatnot? That really has to do with your phase of life and economic conditions, and interestingly has been a relatively stable number even as inflation has increased. It’s also really important to understand that they are based on unverified phone surveys about how people feel they are doing. Consider that they are asking people whether they could cover a one time expense, a month of expenses or three months of expenses. But they don’t ask whether people have access to money. The survey reports that “More than 2 in 3 Americans *would be worried* about having enough emergency savings to cover a month’s worth of living expenses,” so something to bear in mind. https://www.bankrate.com/banking/savings/emergency-savings-report/#no-emergency-savings https://www.bankrate.com/banking/savings/emergency-savings-r...
  - warriormonk5 3y ago
    >> American households, on average, have $41,600 in savings, according to data last collected by the Federal Reserve in 2019. Average vs Median strikes again. Median household has 4k. 70% don't break 10k. It's the high end that weighs on that average pretty hard.
    - happytiger 3y ago
      Not my intention. That’s why I provided the sources. The data in the last link really is worth checking out. I don’t disagree with you, but the numbers I’ve seen numbers are off quite a bit from what you’re quoting. Source? Age Group Mean Net Worth Median Net Worth Less than 35 $76,300 $13,900 35-44 $436,200 $91,300 45-54 $833,200 $168,600 55-64 $1,175,900 $212,500 65-74 $1,217,700 $266,400 75 or more $977,600 $254,800 https://www.firstrepublic.com/insights-education/average-american-net-worth-by-age-education-and-more https://www.firstrepublic.com/insights-education/average-ame...
dangrover 3y ago
It incentivizes you to continue saving the principal, rather than dump it into house. For others, higher rates disincentivize taking marginal credit card debt and large mortgages. Fewer businesses will get credit and will have less to spend on employees (who might otherwise be bidding up wages against other prospective employers).
basementcat 3y ago
IANREE (I Am Not a Real Estate Expert) so please take the following with a grain of salt. If you want to buy a house and believe you can afford one (even at an "inflated" price) along with the cost of maintenance, property taxes, assessments, etc. then go ahead and do it. Best case scenario, real estate values continue to rise and you’re glad you made the move. Worst case, there’s a 2008-style crash and you and millions of other voters get government bailouts. If you’re happy in your current situation, that’s great too!
- woodruffw 3y ago
  > Worst case, there’s a 2008-style crash and you and millions of other voters get government bailouts. I don't think individual mortgage holders, as a class, got government bailouts during the GFC. The closest thing I can think of is the Troubled Asset Relief Program which, to my understanding, largely benefited the banks themselves (by allowing them to offload toxic assets). Am I missing something?
  - basementcat 3y ago
    https://en.m.wikipedia.org/wiki/Home_Affordable_Refinance_Program https://en.m.wikipedia.org/wiki/Home_Affordable_Refinance_Pr... https://en.m.wikipedia.org/wiki/Making_Home_Affordable https://en.m.wikipedia.org/wiki/Making_Home_Affordable
- huytersd 3y ago
  No one got government bailouts during the 2008 crash. People had their houses foreclosed on and the big boys got the bailouts, not regular folks. What on earth are you referring to?
westcort 3y ago
Companies are buying houses at inflated rates with the expectation that cash will lose value due to further inflation. To me, this is the only explanation for mass-buying of homes at a premium price even when interest rates are high.
- great_psy 3y ago
  Well the other explanation is that you are better of buying than renting. If rent prices go up faster than house prices, then you might as well buy at any price. Of course this assumes you can afford it.
majormajor 3y ago
There's a supply side to inflation too, of course, but "increased feeling of wealth" will definitely lead to higher spending on average. Crypto did it too, probably on a larger scale than any money market fund - I know many people who bought a house on the proceeds from bitcoins they bought a decade ago. But if increased demand happens in a market where: (a) new sellers can enter easily and (b) there's low startup cost to competing it will be more of a "rising tide lifts all boats" than a "compete to inflate the prices of the fixed quantity of goods" situation. (Housing is the latter - location, location, location, and construction would lag even in a zero-regulation world. And the difference between now and 2008 is that even if some of that is kinda "funny money" like crypto, there's still real money and real income involved, and less of a "a ton of people are going to have to sell in a hurry" pressure vs the wildly over-leveraged essentially-fraudulent buyers with crazy variable rate terms and such.)
randomdata 3y ago
Slightly different side of the coin, but in Canada – and maybe the US is the same – mortgage interest costs are what is driving inflation. Excluding mortgage interest costs, inflation has been within the target range for quite some time now. So higher interest rates are responsible for inflation in that sense.
woodruffw 3y ago
In your socioeconomic group, maybe. There are also probably a lot of groups for whom high interest rates decrease spending (those of limited means, those with extensive investments but minimal liquid cash, etc.). That's not to say that you're wrong, only that anecdotes don't make a trend :-) (This is why the USG generally pursues a policy of low interest rates and mild inflation: it incentivizes consumer purchasing and investment to have an environment in which dollars in the bank very slowly their purchasing power over time.)
deleted 3y ago
[deleted]
lotsofpulp 3y ago
> Unrelated but Zillow says at 7.5% interest rates that house is now $750k+, weird... makes no sense... counter-intuitive, except for how tight the supply/demand situation must be) I highly doubt this estimate is true, outside of very specific locales. Always ignore Zillow/Redfin estimates, and just look at comparable sales in the recent past.
- agentofoblivion 3y ago
  If your algorithm worked better, don’t you think that would be the algorithm? You think those models don’t consider recent sales?
  - doubleg72 3y ago
    Apparently not in my area
  - willis936 3y ago
    Are you suggesting that the publicly traded, profit maximizing Zillow would suggest prices that are good for buyers rather than use their position in the market to control the price?
  - deleted 3y ago
    [deleted]
  - lotsofpulp 3y ago
    Zillow is a biased party, being a business that earns its income from home sales. They very well could publicize different figures than what they really think, although I think it is more likely that they simply do not have the ability to predict prices any better than most others. Which is why they lost a ton of money in their home buying/selling division and shut it down.
    - hackernewds 3y ago
      that sounds illegal. if a platform has monopoly pricing power, especially on something like housing
reaperman 3y ago
> me having an "oversupply" of money will So, if you were to buy a house you'd spend more for the next 5-10 years but because your payments are fixed, whereas rents will increase each year, there will be a crossover point where your mortgage+tax payments will eventually be quite low. So people who buy a house may pump more cash into the economy in the future. Plus theoretically, whoever sold you the house will be spending any extra cash they get from it (if they buy/rent in a lower cost of living area, or if the house was sold as part of estate that goes to a younger generation). But yes, in the short term you might be pumping the economy with more cash than you would if you bought a house, depending on your ongoing savings rate vs. spending rate.

UncleOxidant 3y ago

> So... the Fed is raising rates to 5% to try and slow inflation. But now I'm earning 5% on a bunch of money to the point that it basically offsets my rent. ... doesn't that contribute to inflation? I don't think your case is all that common. The vast majority of people don't have that much money such that they could earn say $1500+/month with rates at 5%. Offsetting you are a whole lot of people who only have a few thousand dollars available in case of emergency and many more who don't even have that. (that said, I'm really enjoying making 5.5% on tbills.)

pimlottc 3y ago
I’m not a finance expert but don’t you need something like $350000 in the bank to make $1500/mo in interest? https://www.calculator.net/interest-calculator.html?cstartingprinciple=350%2C000&cannualaddition=0&cmonthlyaddition=0&cadditionat1=beginning&cinterestrate=5&ccompound=annually&cyears=5&cmonths=0&ctaxtrate=0&cinflationrate=3&printit=0&x=Calculate#interestresults https://www.calculator.net/interest-calculator.html?cstartin...
- UncleOxidant 3y ago
  Yep. In a CD or a money market account of some sort. 26 week to 1 year Treasury bills are paying around 5.5%.
- wenc 3y ago
  Wouldn't most people with $350k and long investment horizon rather invest that in stocks? (actually asking, I have not idea, just a notion). $350k seems like a lot of money to leave in a money market account as opposed to in a diversified portfolio of stocks/bonds in a tax advantaged account. I'm thinking long term growth. Inflation rates go up and down (i-bonds were not attractive until recently) and so do interest rates. The current 5% rate may not last for long.
  - UncleOxidant 3y ago
    If I got a $350K windfall right now I'd probably put about 70% of it into tbills (6 month to 1 year paying ~5.5% right now) and another 20% into 2 to 5 year treasury notes (paying ~4.7% right now) with the remainder going into an S&P 500 ETF like VOO. I'd DCA into stocks & etfs as the tbills matured. You're right, these 5% rates probably won't last long (though some pundits are saying we're going to be seeing 6+% due to high demand and stubborn inflation so who knows...) but a 5.5% yield on ultra safe treasuries is too hard to pass up right now plus there's no state tax on that interest.
happytiger 3y ago
Don’t be overwhelmed by this response. I recently learned that the 1000 bucks thing is mostly based on Bankrates annual survey and it’s not actually true that they don’t have access to 1k, so this is a little bit an exploration. > American households, on average, have $41,600 in savings, according to data last collected by the Federal Reserve in 2019. And that’s before the free money era and the explosion of wealth from rising interest rates. Of course it’s also true that inflation could be taking a bite out of household wealth. https://time.com/personal-finance/article/average-american-savings-account-balance/#:~:text=American%20households%2C%20on%20average%2C%20have,according%20to%20the%20same%20data https://time.com/personal-finance/article/average-american-s.... People may not have enough saved for retirement, but that’s a separate issue. The surveys of people not having cash on hand to handle a 1000 emergency or whatnot? That really has to do with your phase of life and economic conditions, and interestingly has been a relatively stable number even as inflation has increased. It’s also really important to understand that they are based on unverified phone surveys about how people feel they are doing. Consider that they are asking people whether they could cover a one time expense, a month of expenses or three months of expenses. But they don’t ask whether people have access to money. The survey reports that “More than 2 in 3 Americans *would be worried* about having enough emergency savings to cover a month’s worth of living expenses,” so something to bear in mind. https://www.bankrate.com/banking/savings/emergency-savings-report/#no-emergency-savings https://www.bankrate.com/banking/savings/emergency-savings-r...
- warriormonk5 3y ago
  >> American households, on average, have $41,600 in savings, according to data last collected by the Federal Reserve in 2019. Average vs Median strikes again. Median household has 4k. 70% don't break 10k. It's the high end that weighs on that average pretty hard.
  - happytiger 3y ago
    Not my intention. That’s why I provided the sources. The data in the last link really is worth checking out. I don’t disagree with you, but the numbers I’ve seen numbers are off quite a bit from what you’re quoting. Source? Age Group Mean Net Worth Median Net Worth Less than 35 $76,300 $13,900 35-44 $436,200 $91,300 45-54 $833,200 $168,600 55-64 $1,175,900 $212,500 65-74 $1,217,700 $266,400 75 or more $977,600 $254,800 https://www.firstrepublic.com/insights-education/average-american-net-worth-by-age-education-and-more https://www.firstrepublic.com/insights-education/average-ame...

dangrover 3y ago

It incentivizes you to continue saving the principal, rather than dump it into house. For others, higher rates disincentivize taking marginal credit card debt and large mortgages. Fewer businesses will get credit and will have less to spend on employees (who might otherwise be bidding up wages against other prospective employers).

basementcat 3y ago

IANREE (I Am Not a Real Estate Expert) so please take the following with a grain of salt. If you want to buy a house and believe you can afford one (even at an "inflated" price) along with the cost of maintenance, property taxes, assessments, etc. then go ahead and do it. Best case scenario, real estate values continue to rise and you’re glad you made the move. Worst case, there’s a 2008-style crash and you and millions of other voters get government bailouts. If you’re happy in your current situation, that’s great too!

woodruffw 3y ago
> Worst case, there’s a 2008-style crash and you and millions of other voters get government bailouts. I don't think individual mortgage holders, as a class, got government bailouts during the GFC. The closest thing I can think of is the Troubled Asset Relief Program which, to my understanding, largely benefited the banks themselves (by allowing them to offload toxic assets). Am I missing something?
- basementcat 3y ago
  https://en.m.wikipedia.org/wiki/Home_Affordable_Refinance_Program https://en.m.wikipedia.org/wiki/Home_Affordable_Refinance_Pr... https://en.m.wikipedia.org/wiki/Making_Home_Affordable https://en.m.wikipedia.org/wiki/Making_Home_Affordable
huytersd 3y ago
No one got government bailouts during the 2008 crash. People had their houses foreclosed on and the big boys got the bailouts, not regular folks. What on earth are you referring to?

westcort 3y ago

Companies are buying houses at inflated rates with the expectation that cash will lose value due to further inflation. To me, this is the only explanation for mass-buying of homes at a premium price even when interest rates are high.

great_psy 3y ago
Well the other explanation is that you are better of buying than renting. If rent prices go up faster than house prices, then you might as well buy at any price. Of course this assumes you can afford it.

majormajor 3y ago

There's a supply side to inflation too, of course, but "increased feeling of wealth" will definitely lead to higher spending on average. Crypto did it too, probably on a larger scale than any money market fund - I know many people who bought a house on the proceeds from bitcoins they bought a decade ago. But if increased demand happens in a market where: (a) new sellers can enter easily and (b) there's low startup cost to competing it will be more of a "rising tide lifts all boats" than a "compete to inflate the prices of the fixed quantity of goods" situation. (Housing is the latter - location, location, location, and construction would lag even in a zero-regulation world. And the difference between now and 2008 is that even if some of that is kinda "funny money" like crypto, there's still real money and real income involved, and less of a "a ton of people are going to have to sell in a hurry" pressure vs the wildly over-leveraged essentially-fraudulent buyers with crazy variable rate terms and such.)

randomdata 3y ago

Slightly different side of the coin, but in Canada – and maybe the US is the same – mortgage interest costs are what is driving inflation. Excluding mortgage interest costs, inflation has been within the target range for quite some time now. So higher interest rates are responsible for inflation in that sense.

woodruffw 3y ago

In your socioeconomic group, maybe. There are also probably a lot of groups for whom high interest rates decrease spending (those of limited means, those with extensive investments but minimal liquid cash, etc.). That's not to say that you're wrong, only that anecdotes don't make a trend :-) (This is why the USG generally pursues a policy of low interest rates and mild inflation: it incentivizes consumer purchasing and investment to have an environment in which dollars in the bank very slowly their purchasing power over time.)

deleted 3y ago

[deleted]

lotsofpulp 3y ago

> Unrelated but Zillow says at 7.5% interest rates that house is now $750k+, weird... makes no sense... counter-intuitive, except for how tight the supply/demand situation must be) I highly doubt this estimate is true, outside of very specific locales. Always ignore Zillow/Redfin estimates, and just look at comparable sales in the recent past.

agentofoblivion 3y ago
If your algorithm worked better, don’t you think that would be the algorithm? You think those models don’t consider recent sales?
- doubleg72 3y ago
  Apparently not in my area
- willis936 3y ago
  Are you suggesting that the publicly traded, profit maximizing Zillow would suggest prices that are good for buyers rather than use their position in the market to control the price?
- deleted 3y ago
  [deleted]
- lotsofpulp 3y ago
  Zillow is a biased party, being a business that earns its income from home sales. They very well could publicize different figures than what they really think, although I think it is more likely that they simply do not have the ability to predict prices any better than most others. Which is why they lost a ton of money in their home buying/selling division and shut it down.
  - hackernewds 3y ago
    that sounds illegal. if a platform has monopoly pricing power, especially on something like housing

reaperman 3y ago

> me having an "oversupply" of money will So, if you were to buy a house you'd spend more for the next 5-10 years but because your payments are fixed, whereas rents will increase each year, there will be a crossover point where your mortgage+tax payments will eventually be quite low. So people who buy a house may pump more cash into the economy in the future. Plus theoretically, whoever sold you the house will be spending any extra cash they get from it (if they buy/rent in a lower cost of living area, or if the house was sold as part of estate that goes to a younger generation). But yes, in the short term you might be pumping the economy with more cash than you would if you bought a house, depending on your ongoing savings rate vs. spending rate.